The idiocy of a handful of gamblers should not be construed as a
problem with the system as a whole, institutions like JP Morgan
said.

Well-run banks should be trusted not to be so colossally reckless
and stupid. Well-run banks should be allowed to manage their own
risks. Well-run banks should not be hammered with strait-jacket
regulations that would stymie their marvelous money-making
innovation. Well-run banks should be free to look after
themselves, like responsible adults.

And the banking lobbying engine rushed this message to Washington
and threw money around. And the lobby quickly persuaded Congress
that Wall Street was fine, that the financial crisis was an
aberration, that Wall Street should be left alone.

JP Morgan was the prime engine of this message. And its brilliant
CEO, Jamie Dimon, was Wall Street's defiant Adult In Chief.

(And I mean "brilliant" in all seriousness. I am a huge Jamie
Dimon fan. The fact that this could happen to his bank makes
clear that it could happen to anyone's.)

Dimon had credibility, because unlike all the other incompetent
banks, his bank hadn't imploded and brought the system to the
edge of catastrophe.

And unlike all the other CEOs, to his great credit, Dimon
actually talked like a human, with language and confidence that
persuaded even skeptics that he knew what he was talking about.

But now JP Morgan has blown up.

So we finally know the truth about Wall Street, a truth most Wall
Street observers have known all along:

Wall Street can't be trusted to manage—or even correctly
assess—its own risks.

This is in part because, time and again, Wall Street has
demonstrated that it doesn't even KNOW what risks it is taking.

In short, Wall Street bankers are just a bunch of kids playing
with dynamite.

There are two reasons for this, neither of which boil down to the
"stupidity" that most people generally assume is involved. The
bankers who place these bets are anything but stupid.

The first reason is that the gambling instruments the
banks now use are mind-bogglingly complicated.Warren Buffett once described
derivatives as "weapons of mass destruction." And those weapons
have gotten a lot more complex in the past few years.

The second reason is that Wall Street's incentive
structure is fundamentally flawed: Bankers get all of
the upside for winning bets, and someone else—the government or
shareholders—covers the downside.

The second reason is particularly insidious. The worst thing that
can happen to a trader who blows a huge bet and demolishes his
firm—literally the worst thing—is that he will get
fired. Then he will immediately go get a job at a hedge fund and
make more than he was making before he blew up the firm.

Meanwhile, if the trader's bet works—and the bigger the
better—he'll look like a hero and collect an absolutely massive
bonus.

If you had those incentives, you would do exactly the same thing
that Wall Street traders do: Bet the company, day after day.
(It's not your company, after all, so who the heck
cares?)

So, what's the solution?

It's very simple.

Congress needs to:

Radically increase bank capital requirements,
so even massive bets can't threaten the system

Once again, separate "banking" from Wall Street
gambling. Glass Steagall worked very well for 70
years—let's bring it back.

Lay out a plan, in advance, to manage the failure of
even the largest financial institutions—by stepping in, seizing
the bank, firing management, zeroing out shareholders,
haircutting bondholders, and then injecting new SENIOR capital
(fully protected) and re-floating or selling off the
firm. This will allow the entity to keep operating,
and it will stick the losses where they belong—with the idiots
who bought the bank's stock or loaned it money. Meanwhile, the
systemic threat will be eliminated.

That's the answer.

And now that JP Morgan has proven that even "the best" banks
haven't the faintest idea what they're doing (or don't care),
it's time for Congress to finally make it happen.

That nothing changed after the financial crisis is outrageous.
But if nothing happens now, our entire government should resign
in shame.